Still No Evidence Of Deflation

Posted by Tom Lindmark on March 18th, 2009

Deflation talk was deflated again today as consumer prices rose 0.4% in February following a 0.3% increase in January.

Stripping out food and energy prices, the index was up 0.2% the same increase as was seen in January. Energy prices rose 3.3% and curiously apparel prices were up 1.3%. Here are some economists reactions from the WSJ Real Time Economics blog:

Consumer inflation in the first two monthsof the year is starting to look more normal than the extremely depressed numbers that printed in the fourth quarter of last year. The last two readings on core inflation have almost certainly given the Fed some comfort, easing fears that last quarter’s figures presaged a quick slide into deflation. Looking through the details, much of the increase this month was accounted for by increases in certain goods prices that are likely to soon fade, while the more persistent rental components are showing continued deceleration. In other words, the trend continues toward softer inflation, albeit at a moderate pace of descent… What is going on with the price of mens’ shirts and sweaters? Over the last two months these prices are up at a 64% annualized rate. Mens’ apparel more generally is up at a record 29% rate, contributing to the strong 1.3% sequential increase in apparel prices in today’s report. Another odd factor in today’s report is the 0.8% increase in new vehicle prices, one of the fastest increases seen in the past twenty-five years. Given the state of auto sales, the February increase looks unusual. –Michael Feroli, J.P. Morgan Chase

Even with energy prices having flattenedout of late, the deflation risk confronting the U.S. economy is real. Moreover, unless there is a powerful V-shaped recovery — which we deem highly unlikely — it is going to be several years before there is any legitimate reason to be concerned about a resumption of inflation risk. –David Greenlaw, Morgan Stanley

There are two points that we have been repeatedly hammering recently that come through very starkly from the February CPI. First, deflation will not happen unless/until downward price pressure widens out beyond the Fearsome Five [new vehicles, apparel, airlines, hotels, and used vehicles], and while logic would support the proposition that pricing should be soft in the current economic environment, the data simply are not showing a widening out of deflationary pressure. Second, for those items that are very cyclically sensitive, the point of maximum downward price pressure may have already passed. Even if the January/February numbers end up being temporary anomalies, clothing manufacturers and automakers will in the coming months slash production by enough that the imperative to cut prices to get merchandise out the door will ease (if it hasn’t already). –Stephen Stanley, RBS Greenwich Capital